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Why no one should listen to Lorrie Goldstein

Toronto Sun columnist Lorrie Goldstein has something of a fixation on carbon pricing. He never misses an opportunity to condemn the idea. Even when there is nothing really going on with the climate change file, he will pump out a column complaining about the “hysteria” or the “myths” surrounding global warming. Number one myth is the idea that carbon pricing can be an effective policy response. His reasoning is fairly simple: carbon taxes don’t work, and since they don’t work, they must be nothing other than a cash-grab by the government.

Now if you read his stuff regularly, you get the sense that there is something wonky in his understanding of how the economy works. Indeed, it’s always fun listening to people on the right try to explain why carbon pricing can’t possibly work, because they usually wind up inadvertently ‘proving’ that capitalism as a whole can’t work. In other words, the arguments they make inevitably boil down to the claim that consumers are insensitive to price signals for ordinary market goods, such as gasoline. But of course, if people don’t respond to price signals, then what’s the point of having a market economy? (The more sophisticated try to argue that price elasticity of demand for fossil fuels is zero, or that maybe it’s a Giffen good. Those ones are not confused, they’re just mistaken. Most are just confused.)

In any case, reading Goldstein’s broad condemnations, you get a sense that he’s confused about how the economy works. This week, however, he tipped his hand, writing a jewel of a column – entitled “An Honest Carbon Tax” – that reveals the depth of his economic illiteracy. I counted three major economic fallacies in it, but if anyone can find more, go for it.

I should mention that the leader of the Progressive Conservative Party of Ontario has endorsed carbon pricing, Goldstein is starting to find himself without allies, and feeling a bit exposed on the very, very far right. This may account for the somewhat capitulatory tone at the end of the column. Let’s start with this, because the “positive” proposal that he makes is downright peculiar:

There’s a simple way to impose a national, revenue neutral carbon tax.

Raise the HST — in effect a carbon tax because it broadly taxes consumption — while returning 100% of the money raised to Canadians in the form of income tax cuts and grants to the poor who don’t pay income taxes.

That would encourage people to reduce consumption by making less carbon intensive choices in their purchases of goods and services — thus lowering emissions — while avoiding a recession by allowing people to keep more of the money they earn.

But our governments aren’t interested in lowering emissions. They’re interested in taking more of our money, even if it causes a recession.

So much going on here! He wants to raise the HST, and “return the money raised” to Canadians in the form of income tax cuts. This is an odd way to describe a shift in the tax base away from income taxes toward consumption taxes (what Paul Martin proposed, and Stephen Harper undid), but let’s pass that by. What I’m interested in is his idea that raising the HST is good, because it will lower consumption, and since consumption as a whole is what generates global warming, that will be good. All of this can be done, by the way, “without causing a recession.”

The big problem here is a conceptual one. He seems to be unaware of the following equivalence, which governs the economy as a whole (ignoring balance-of-trade):

total production = total consumption

This is because the economy is, fundamentally, a system of exchange. Goods are exchanged for other goods (also ignoring money – and we’re not in a recession, so we can ignore money). One person’s production is someone else’s consumption. So if increasing the HST were to reduce “consumption,” then it would also be reducing “production” – which is to say, the size of the economy would contract. This is what it means to have a recession.

So what he is recommending here is what environmentalists call a “degrowth” strategy (although I don’t think he intended to be positioning himself with the likes of Naomi Klein, but economic illiteracy makes for strange bedfellows). Of course, even then the way he has put it is dumb, since his proposal would not actually have the effect of reducing consumption. He wants to match the HST increase with corresponding income tax cuts & credits, so family budgets would be unaffected. How will that reduce consumption? What are people supposed to do with that money but spend it?

Ah but you say, perhaps they will save more. Here there is another relevant equivalence:

total income = total spending + total savings

Maybe he’s thinking that raising the HST will shift money out of consumer spending and into savings. Okay, well if the goal is to increase savings, then that could also be achieved by, say, increasing RRSP contribution limits. It might be difficult to sell that as a way to combat global warming! That’s because, of course, it wouldn’t. The money that is “saved” is just lent out again by banks, and someone else spends it. So the above equivalence is better described as follows:

total income = total amount you spend + total amount you lend to other people to spend

This is just a way of making the obvious point that increasing the savings rate does not reduce the size of the economy, or reduce aggregate demand (under ordinary circumstances, which we are in). On the contrary, it typically increases the rate of growth, and hence of total consumption in the long term.

But we’re just getting starting, digging down into the crazy. There are obviously some weird ideas in here about what causes recessions. Consider, for instance, what he says earlier in the piece:

The concern is that in order to impose carbon prices high enough to lower greenhouse gas emissions linked to climate change, they will have to take so much money from us, it will cause a recession…

Even that sounds low, but the point is a carbon price of $160-per-tonne would have devastating consequences for our economy if it is not 100% revenue neutral.

That is, if the government doesn’t lower income taxes by the same amount it increases its revenues through carbon pricing.

This is an instance of what I elsewhere describe as the “government as consumer” fallacy. The idea – and it sounds crazy when you say it like this, but many people on the right really believe it – is that government is some sort of black hole, where once it taxes people, the money just disappears from the economy. This is then thought to cause the shortfall in demand that creates a recession. In other words, they think that somehow only consumer spending drives production, so the size of the economy is determined by the amount of consumer demand. This is why Goldstein thinks that, when the government imposes a carbon tax, it has to “give the money back” to consumers, otherwise there will be a recession – or in other terms, why he thinks that a revenue neutral carbon tax will have significantly different macroeconomic consequences than a revenue-generating one.

Needless to say, when the government raises money through taxation, the money does not disappear. It also gets spent. In fact, the government is just as good at turning money into demand as consumers are, and in many circumstances is somewhat better (observe the federal government deficit).

I should mention, perhaps in passing, that Goldstein’s misunderstanding of how the demand side of the economy works has been encouraged by generations of right-wing economists (who themselves know better), with their constant insistence that tax cuts will “stimulate” the economy. They almost never specify the (rather indirect) mechanism through which this stimulus is supposed to occur, and so many ordinary people jump to the conclusion that the government must be just sitting on the money, so that “releasing” it to consumers increases aggregate demand.

Final observation. The column misses the whole point, with respect to carbon pricing, in a very fundamental way. Consider the bizarre claim that increasing the HST “would encourage people to reduce consumption by making less carbon intensive choices in their purchases of goods and services.” Huh? Isn’t that what carbon taxes do? Reducing all consumption, as a way of reducing greenhouse gas emissions, is an incredibly blunt strategy – like pouring Roundup over your entire lawn just to get out a few weeds. The entire point of carbon pricing is that it increases the relative price of carbon-intensive goods, while lowering the relative price of non-carbon-intensive goods. It encourages people to paddle canoes, instead of riding jet-skis, etc. etc. It is the economic equivalent of a precision strike. The fact that Goldstein doesn’t get this is such a profound and fundamental misunderstanding of how markets work, that it really does disqualify him from being taken seriously on this, or any other, economic issue.

Can someone maybe send Bill Watson over to this guy’s house to straighten him out a bit? Or maybe we could do a Kickstarter to send him to this course? There must be something we can do.

Fun story about the ‘cash flow’ misunderstandings of economics: During HST referendum here, some people figured they had ‘caught’ me when saying that allowing deductions for tax paid on business inputs would both lower consumer prices and spur investment. Aha! How can it do both? Gotcha!

The answer of course, is that the business investment is not spurred by cash flow but by removal of marginal tax penalty for investment.

The same fallacy plagues analysis of corporate tax cuts and the ‘zombie money’ analysis of corporate balance sheets.

Similarly, governments can function as a black hole and destroy money, but in fact they do this by running a surplus and paying off their debt, which is held as savings by the non government sector, and in doing so decrease net private sector assets. This is why, as a Brit, I’m kind of confused as to how I should feel about George Osborne’s budget surplus rule. On the one hand, it’s counter productive economic lunacy. On the other, recessions are great at lowering carbon emissions, I guess.

Indeed, taxing consumption would stimulate savings (which are not just ”spending by others” but also deferred spending). But taxing consumption progressively could have a framing effect on the wealthy (maybe I won’t buy another car, worth X, if I have to pay a tax that is almost X!), thus slowing down conspicuous consumption and, more generally, overconsumption. In which case, there would be too much savings and not enough spending, so interest rates would be low, and there would be almost no return on investment. It would be kind of a quasi-stationary state. But since the climate/environmental crisis is not reducible to global warming (there is also, for instance, the problem of domestic wastes), carbon pricing would not be sufficient, and taxing consumption progressively could be a soft way toward a stationary state, or even toward equitable degrowth.

Would love your take on that (hope I’m not perpetuating economic fallacies..).

Total production = Total consumption + Total investment. We don’t have to eat all the corn we harvest, we can plant some for next year. We don’t have to turn all the steel we make into cars, we can use some to build new factories. This is elementary.

Reducing consumption doesn’t necessarily mean reducing production. Indeed, we would expect reducing income taxes (which cause investment to be doubly taxed) and increasing consumption taxes by an offsetting amount to reduce consumption in the short term without reducing production. In the long term, it would raise both production and consumption, because increased investment will increase production.

You also mistake Goldstein’s argument about why a non-neutral carbon tax would be such a disaster. The idea – and it sounds crazy when you say it like this, but many people on the left really believe it – is that only the amount of money in the economy matters, and not what it’s spent on. But in reality, government spending is wasteful, and results in lower output per dollar than in the private sector, and the higher taxes will cause deadweight loss. In other words, this will result in a recession not through the AD channel, but through AS.

Finally, your column misses the point, in a most fundamental way. Goldstein has written an excellent column about how increased carbon taxes will undermine the real determinants of wealth creation – production/Aggregate Supply/etc. You have (deliberately?) mis-parsed everything through the lens of Aggregate Demand and (mistaken!) accounting identities. AD can be important too, but that’s not what this is about. I’d say no-one should listen to you, but I won’t sink to your level of rudeness.

This is an instance of what I elsewhere describe as the “government as consumer” fallacy. The idea – and it sounds crazy when you say it like this, but many people on the right really believe it – is that government is some sort of black hole, where once it taxes people, the money just disappears from the economy.

To an extent I agree with Salem. What right wing critics of government spending are getting at by “government as consumer” talk is that governments tend to get less in actual goods and services for the same amount of money spent. And what matters is the actual goods and services produced. The “government as consumer” talk may be somewhat misleading, but there a real concern behind it.

I don’t think anyone here would dispute that the private sector is more efficient in cases where market conditions apply. But since government spending is typically focused on things that markets are lousy at providing (universally accessible healthcare springs to mind) the question of comparative efficiency is fairly moot, is it not?
Also, I can’t help noticing that Salem fails to address what I take to be the central point of Dr Heath’s argument, which is that prices have incentive effects. Raising the cost of carbon emissions should have the effect not only of lowering energy consumption but also encouraging the development of greener energy sources, something a general increase in consumption taxes would not do.

The idea that one shouldn’t listen to others is simply an invitation to the echo chamber. Of course we should listen to others. That doesn’t mean we need to agree in whole or in part, or act upon their ideas. But if your point of view is valid, you owe it to yourself to consider other opinions and critiques, and evaluate whether you are on the right track. To constantly assume you are right, and formulate hypotheses in such a way as to confirm this, is to guarantee when you are right it will be by blind luck, and not by way of reason or logic.

Sneering condescension and ad homs are seldom the bedrock of solid analysis. And ignoring real world evidence or cherry picking only convenient parts similarly point to bias. The fact of the matter is that climate is not something where certainty is warranted. And as Salem pointed out, you may be overconfident in your economic analysis as well. The assertion that “the government is just as good at turning money into demand as consumers are”, with the deficit as an example, is bizarre. In fact, I can’t think of any sound economics argument that would support it. Bureaucracies that essentially move money from place to place while taking a cut, without adding any value or production are just a little different than the average consumer model. This whole line of thought makes it hard to place any significance in the rest of the piece.

And in your final analysis you confirm your missteps with this gem: “The entire point of carbon pricing is that it… is the economic equivalent of a precision strike.” Unless subsistence farming is how you eek out a meager living, this of course is not true. Carbon pricing is broad based. What in our modern lives is mined, refined, manufactured, packaged, shipped, or installed without use of or access to the primary target of carbon pricing; fossil fuels? Consider wind turbines and solar panels wouldn’t be possible without them…

Let me explain some of Professor Heath’s key points another way by addressing two of your erroneous arguments…

1. Bureaucracies that move money from place to place while taking a cut…etc. By this I assume you are talking about public sector wages. Even if you assume the public goods that public sector workers provide (such as healthcare, police, fire, border inspections, defence) are worthless those wages will be spent in the market anyway by those workers so your argument is nonsense. I think what you really don’t like is that someone else gets to decide how a small fraction of your money will be spent, instead of you. But that’s not an economic argument, that’s being selfish. 2. What in our economy…without…fossil fuels? Well that is is the point. To engage in activity or develop affordable technology that uses LESS fossil fuel. Eg. Make bikes locally that you ride instead of a fossil fuel powered car to your nearby job instead of the one on the other side of a sprawling metropolis. Again, your argument is one of personal preference, not general economics.